Working Paper BETA #2021-38

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Title : Fiscal rules’ compliance and Social Welfare

Author(s) : Kea BARET

Abstract : This paper studies the side-effects of fiscal rules’ compliance on the economy and social welfare. It considers Budget Balance Rules’ (BBR) compliance effects on maroeconomic indicators and social welfare proxy indicators in sixteen countries between 2004 and 2015. Instead of fiscal rules strength or fiscal rules presence effectiveness, we focus on fiscal rules’ compliance to assess the impact of governments behavior on the social area. The paper shows that governments go beyond the expected trade-off between BBR’s compliance and GDP Growth by operating a reallocation of their spending. Such choices in public expense lead to an increase in social inequalities highlighted that governments finally face a trade-off between fiscal rules’ compliance and social objectives. The analysis constitutes the first use of double/debiased machine learning for treatment recently developed by Chernozhukov et al. [2018] applied to fiscal discipline issues. Through this method we are able to highlight key determinants for BBR’s compliance and assess the compliance’s effect on different macroeconomic and social indicators. We take care of Voter Preferences by computing a new proxy though Latent Factor Analysis Approach, and show that Voter prefenreces appear as a key variable for BBR’s compliance, giving an empirical proof that Wyplosz [2012]’s bias matters.

Key-words : Fiscal rules’ compliance; Social Welfare; Fiscal Surveillance; Machine learning.

JEL Classification : E61, H11, H50, H61, H62